Banks to cease issuance of SOR derivatives and Sibor-linked financial products by Sept

FINANCIAL institutions will have to cease the use of the Swap Offer Rate (SOR) in new derivatives contracts by end-September 2021, in a freshly announced timeline to further push the industry towards the Singapore Overnight Rate Average (Sora) as the main interest rate benchmark.

With SOR to discontinue in mid-2023, this move addresses the risk of continued reliance on SOR derivatives, which will increase operational and financial risks for market participants, said a report by a financial industry-led steering committee. This will delay the industry benchmark transition to Sora.

The requirement to cease new transactions will exclude SOR derivatives transactions for risk management of and transition from legacy SOR positions.

The new timeline will give market participants sufficient advance notice to prepare for changes, and is in line with the committee's targets for banks to wind down SOR derivatives exposures to 20 per cent by end-September, said the report.

This comes as financial institutions are set to cease usage of SOR in new loans and securities that mature after end-2021 by end-April, with all banks to be ready to offer new Sora-based products by then - this was announced in October last year.

While SOR remains available till mid-2023, liquidity in SOR derivatives markets has started to decline and this trend will likely accelerate with the new cessation timeline on the use of new SOR derivatives, said the committee.

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On Wednesday, the Steering Committee for SOR and Sibor Transition to Sora (SC-STS) also recommended that financial institutions cease the use of Singapore Interbank Offered Rate (Sibor) in new contracts by end-September.

Sibor is widely used by the retail and small and medium-sized enterprise segments in loans. As of March 2021, most major banks have started offering Sora mortgages, and retail take-up has been encouraging with more than S$1 billion of such loans extended as at end-2020, said the report.

This is consistent with the preparation for the discontinuation of the less widely used six-month Sibor by March 2022, and the widely used one-month and three-month Sibor benchmarks by end-2024.

There is no immediate impact on existing Sibor loans.

In addition, the committee also reviewed its guidance around the fallback rate for SOR, which was designed only as an interim fallback solution for contracts that cannot be transitioned to Sora before SOR ceases. It was previously announced that the fallback rate would be published for a period of about three years following the expected discontinuation of SOR after end-2021.

But with SOR set to be discontinued in mid-2023 due to the extension of the cessation of the US dollar Libor (USD Libor), more existing legacy SOR transactions would be able to mature and the need for the extended fallback rate would be much lower, said the committee.

As such, the original end-2024 end-date for the fallback rate will be retained, which will help to reduce the risk of transition inertia and channel more liquidity into developing the Sora market.

Samuel Tsien, chairman of the Association of Banks in Singapore and SC-STS, noted: "The industry has made significant progress over the past year to develop new Sora markets, including usage of Sora in a wide variety of cash market products and growing adoption in derivatives."

"With this latest move by the industry committing to cease issuance of SOR derivatives and Sibor-linked products by end-September 2021, we look forward to a single Sora-centred interest rate benchmark regime, which will be beneficial to both customers and financial institutions for a more transparent and efficient market," said Mr Tsien, who is also group chief executive officer of OCBC Bank.

Leong Sing Chiong, deputy managing director of the Monetary Authority of Singapore and SC-STS member, urged market participants to "take active steps to shift both new use and legacy exposures to Sora, so as to minimise financial and operational risks as liquidity in SOR derivatives markets is expected to decline in 2022".

Singapore is in the midst of its move from SOR and Sibor to Sora as the new interest rate benchmark. This comes on the back of the discontinuation of the scandal-tainted Libor (London Inter-Bank Offered Rate) at end-2023, which would affect SOR as it uses the USD Libor in its computation.

SOR is used in pricing of bonds and loans to large institutions with hedging requirements, as it is also the reference benchmark in Singapore dollar (SGD) derivatives.

Close to S$1.4 trillion notional value of outstanding SGD derivatives contracts referencing SOR, and around 12,000 SOR contracts in SGD cash markets amounting to S$95 billion will mature after end-2021, and will need to transition.

Sora was selected as the new interest rate benchmark as it was found to be the "most robust and suitable alternative", underpinned by a deep and liquid overnight funding market.

As for Sibor, it will be discontinued by end-2024, in line with global reform efforts to improve the robustness and integrity of financial benchmarks.